ContentsReport on operations

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Axfood is a Swedish company that is governed by Swedish law. All monetary amounts stated herein are in Swedish kronor. Millions of kronor are abbreviated as SEK m and billions as SEK bn. Figures in parenthe- ses pertain to 2005, unless stated otherwise. Market and competitive data are Axfood’s own estimates, unless reference is made to a specifi c source. These estimations are based on the best and most recent data available from published sources in the public sector, the consumer goods industry and competitors.

Axfood Annual Report 2006

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Axfood is a Swedish company that is governed by Swedish law. All monetary amounts stated herein are in Swedish kronor. Millions of kronor are abbreviated as SEK m and billions as SEK bn. Figures in parenthe- ses pertain to 2005, unless stated otherwise. Market and competitive data are Axfood’s own estimates, unless reference is made to a specifi c source. These estimations are based on the best and most recent data available from published sources in the public sector, the consumer goods industry and competitors.

Axfood Annual Report 2006

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Axfood’s business mission is to create, develop and operate successful grocery store chains – wholly owned or in franchise form. Axfood aspires to be the challenger in the Nordic retail food market through distinct and unique customer offerings.

Administration & IT Corporate Communications Human Resources Structure/Establishment Products & Purchasing

Hemköpskedjan AB Willys AB Dagab AB Axfood Närlivs AB Finance, accounting & control, safety, IT, overall administration

IR, internal & external communication, branding

Training & leadership development

Structure & store establishment

Central purchasing, product assortment development, private labels, quality assurance, consumer contact

Executive Committee

CEO

Market shares, largest competitors in Sweden 2006, %

■ Axfood 15.4%

■ Ica 47.5%

■ Coop 24.5%

■ Bergendahls 8.4%

■ Lidl 2.7%

■ Netto 1.5%

Source: ICA Nyheter, Dec. 2006.

Organizational structure

Axfood’s organization is characterized by few decision-making levels and strong focus on low administrative costs. At the cen- tral level the Group achieves economies of scale by combining such functions as purchasing, private label products, logistics, IT, fi nance administration, human resources and leadership

The management teams of the individual chains are responsible for store operations, marketing, product assortment and pricing strategies.

Axfood’s store managers and collaborating proprietors work in direct daily contact with their customers and are responsible for making sure that their stores are appealing, well-stocked, Axfood conducts food retail and wholesale trade in Sweden.

The Group’s retail operations are conducted through the Group-owned Willys and Hemköp stores, comprising 224 stores in all. In addition, Axfood collaborates with a large number of proprietor-run stores that are tied to Axfood through agreements. These include stores within the Hemköp and Willys chains as well as stores run under the Handlar’n and Tempo profi les. In all, Axfood collaborates with more than 500 proprietor-run stores. Wholesale business is conducted through Dagab and Axfood Närlivs. Axfood is quoted on the OMX Nordic Exchange, Large Cap list. Axel Johnson AB is the principal owner with approximately 45% of the shares.

Axfood has an approximate 15.4% market share in Sweden.

Presenting Axfood

AXFOOD AT A GLANCE AXFOOD AT A GLANCE

Company Sales, SEK m Operating proﬁ t, Average no. Key data

SEK m employees

Share of Group total Share of Group total Share of Group total

Business concept: Dagab streamlines the fl ow of products and information between suppliers and retailers. Dagab is being integrated increasingly with Axfood’s wholly owned store chains in the aim of enhancing effi ciency and delivery reliability.

Number of wholly owned stores: 76

Number of franchise stores: 82 Retail area, Group-owned stores:

116,500 sq.m.

Number of stores: 148, of which are 43 Willys hemma stores

Number of franchise stores: 3 Retail area (Willys):

248,700 sq.m.

Retail area (Willys hemma):

30,400 sq.m.

Distribution centres: 3 Cold-storage warehouses: 1 Total sales: SEK 20,572 m

Distribution centres: 3 Cash and carry outlets: 20 Business concept: Hemköp develops

Sweden’s best food stores. Hemköp promotes the well-being of its customers by helping them fi nd healthy foods.

Business concept: Willys seeks to lead and develop the discount retail food segment by:

offering “Sweden’s cheapest bag of groceries”

and giving its customers an inspiring shopping experience.

Business concept: Axfood Närlivs cooperates with customers and suppliers through commitment, knowledge and simplicity.

With the right product range and marketing concepts, Axfood Närlivs works together with its customers to create conditions for profi tability and growth.

Other SEK 167 m SEK 233 m 348

Group total

Axfood Närlivs

Total number of wholly owned stores: 224 Total number of distribution centres: 6

Total number of cash and carry outlets: 20

Total retail area 395,600 sq.m.

(Group-owned stores) SEK 28,808 m SEK 1,204 m 7,007

Annual General Meeting and fi nancial information

Annual General Meeting

The Annual General Meeting of the shareholders of Axfood AB (publ) will be held at 5 p.m. on Thursday, 8 March 2007, at the Grand Hotel in Stockholm.

Notiﬁ cation

Shareholders who wish to attend the Annual General Meeting must notify the Company of their intention not later than 4 p.m. on Friday, 2 March 2007, at the following address:

Axfood AGM, Box 47021, SE-100 74 Stockholm. Notifi cation can also be made by phone by calling +46-8-775 03 23, by fax at +46-8-775 81 65, or by e-mail: jessica.olvestad@axfood.se.

Notifi cation should include the shareholder’s name, address, social security number/company registration number, phone number, the number of shares held and the number of assistants attending. For notifi cations sent by fax, please mark the fax

“Axfood AGM”. If participating by proxy, a proxy form should be sent to the Company and be in Axfood’s possession before the Annual General Meeting.

Participation

To be able to participate in the Meeting, shareholders must be recorded in the register of shareholders maintained by VPC AB not later than Friday, 2 March 2007, and notify the Company of their intention to participate in the Meeting not later than 4 p.m. on Friday, 2 March 2007. Shareholders whose shares are registered in the name of a nominee must temporarily re-register their shares in their own names with VPC AB to be entitled to vote at the Meeting. Shareholders must notify their nominees well in advance of Friday, 2 March 2007.

Proposed dividend

The Board of Directors proposes a dividend of SEK 12.00 per share (9.00). In addition, the Board proposes an extra dividend of SEK 8.00 per share (6.00), entailing a total dividend for 2006 of SEK 20.00 per share (15.00). The record date is Tuesday, 13 March 2007, and dividends are expected to be paid via VPC on Friday, 16 March 2007. The last day for trading in the Com- pany’s stock including the right to the dividend is Thursday, 8 March 2007.

Notice of Annual General Meeting

Notice of the Annual General Meeting is made by letter to the shareholders as well as through advertisements in Svenska Dagbladet and the Offi cial Swedish Gazette. The agenda of the Meeting and items of business to be conducted are included in this notice.

Financial calendar 2007

Interim report January–March, 18 April Interim report January–June, 18 July

Interim report January–September, 17 October

Sales reports are released separately for the months January, February, April, May, July, August, October and November. For release dates, visit www.axfood.se fi nancial info/calendar. Copies of this annual report will be sent to shareholders upon request.

ANNUAL GENERAL MEETING AND FINANCIAL INFORMATION

Text and production: Axfood, Hallvarsson&Halvarsson.

Design: Meze Design.

English translation: Joseph Brennan.

External sales SEK 3,127 m 11%

SEK 226 m 19%

978 14%

SEK 5,829 m 20%

SEK 79 m 7%

1,920 27%

SEK 15,115 m 52%

SEK 558 m 46%

3,150 45%

SEK 4,570 m 16%

SEK 108 m 9%

611 9%

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Axfood’s business mission is to create, develop and operate successful grocery store chains – wholly owned or in franchise form. Axfood aspires to be the challenger in the Nordic retail food market through distinct and unique customer offerings.

Administration & IT Corporate Communications Human Resources Structure/Establishment Products & Purchasing

Hemköpskedjan AB Willys AB Dagab AB Axfood Närlivs AB Finance, accounting & control, safety, IT, overall administration

IR, internal & external communication, branding

Training & leadership development

Structure & store establishment

Central purchasing, product assortment development, private labels, quality assurance, consumer contact

Executive Committee

CEO

Market shares, largest competitors in Sweden 2006, %

■ Axfood 15.4%

■ Ica 47.5%

■ Coop 24.5%

■ Bergendahls 8.4%

■ Lidl 2.7%

■ Netto 1.5%

Source: ICA Nyheter, Dec. 2006.

Organizational structure

Axfood’s organization is characterized by few decision-making levels and strong focus on low administrative costs. At the cen- tral level the Group achieves economies of scale by combining such functions as purchasing, private label products, logistics, IT, fi nance administration, human resources and leadership development.

The management teams of the individual chains are responsible for store operations, marketing, product assortment and pricing strategies.

Axfood’s store managers and collaborating proprietors work in direct daily contact with their customers and are responsible for making sure that their stores are appealing, well-stocked, and for treating customers in a professional manner that refl ects the profi le of their respective stores.

Axfood conducts food retail and wholesale trade in Sweden.

The Group’s retail operations are conducted through the Group-owned Willys and Hemköp stores, comprising 224 stores in all. In addition, Axfood collaborates with a large number of proprietor-run stores that are tied to Axfood through agreements. These include stores within the Hemköp and Willys chains as well as stores run under the Handlar’n and Tempo profi les. In all, Axfood collaborates with more than 500 proprietor-run stores. Wholesale business is conducted through Dagab and Axfood Närlivs. Axfood is quoted on the OMX Nordic Exchange, Large Cap list. Axel Johnson AB is the principal owner with approximately 45% of the shares.

Axfood has an approximate 15.4% market share in Sweden.

Presenting Axfood

AXFOOD AT A GLANCE AXFOOD AT A GLANCE

Company Sales, SEK m Operating proﬁ t, Average no. Key data

SEK m employees

Share of Group total Share of Group total Share of Group total

Business concept: Dagab streamlines the fl ow of products and information between suppliers and retailers. Dagab is being integrated increasingly with Axfood’s wholly owned store chains in the aim of enhancing effi ciency and delivery reliability.

Number of wholly owned stores: 76

Number of franchise stores: 82 Retail area, Group-owned stores:

116,500 sq.m.

Number of stores: 148, of which are 43 Willys hemma stores

Number of franchise stores: 3 Retail area (Willys):

248,700 sq.m.

Retail area (Willys hemma):

30,400 sq.m.

Distribution centres: 3 Cold-storage warehouses: 1 Total sales: SEK 20,572 m

Distribution centres: 3 Cash and carry outlets: 20 Business concept: Hemköp develops

Sweden’s best food stores. Hemköp promotes the well-being of its customers by helping them fi nd healthy foods.

Business concept: Willys seeks to lead and develop the discount retail food segment by:

offering “Sweden’s cheapest bag of groceries”

and giving its customers an inspiring shopping experience.

Business concept: Axfood Närlivs cooperates with customers and suppliers through commitment, knowledge and simplicity.

With the right product range and marketing concepts, Axfood Närlivs works together with its customers to create conditions for profi tability and growth.

Other SEK 167 m SEK 233 m 348

Group total

Axfood Närlivs

Total number of wholly owned stores: 224 Total number of distribution centres: 6

Total number of cash and carry outlets: 20

Total retail area 395,600 sq.m.

(Group-owned stores) SEK 28,808 m SEK 1,204 m 7,007

Annual General Meeting and fi nancial information

Annual General Meeting

The Annual General Meeting of the shareholders of Axfood AB (publ) will be held at 5 p.m. on Thursday, 8 March 2007, at the Grand Hotel in Stockholm.

Notiﬁ cation

Shareholders who wish to attend the Annual General Meeting must notify the Company of their intention not later than 4 p.m. on Friday, 2 March 2007, at the following address:

Axfood AGM, Box 47021, SE-100 74 Stockholm. Notifi cation can also be made by phone by calling +46-8-775 03 23, by fax at +46-8-775 81 65, or by e-mail: jessica.olvestad@axfood.se.

Notifi cation should include the shareholder’s name, address, social security number/company registration number, phone number, the number of shares held and the number of assistants attending. For notifi cations sent by fax, please mark the fax

“Axfood AGM”. If participating by proxy, a proxy form should be sent to the Company and be in Axfood’s possession before the Annual General Meeting.

Participation

To be able to participate in the Meeting, shareholders must be recorded in the register of shareholders maintained by VPC AB not later than Friday, 2 March 2007, and notify the Company of their intention to participate in the Meeting not later than 4 p.m. on Friday, 2 March 2007. Shareholders whose shares are registered in the name of a nominee must temporarily re-register their shares in their own names with VPC AB to be entitled to vote at the Meeting. Shareholders must notify their nominees well in advance of Friday, 2 March 2007.

Proposed dividend

The Board of Directors proposes a dividend of SEK 12.00 per share (9.00). In addition, the Board proposes an extra dividend of SEK 8.00 per share (6.00), entailing a total dividend for 2006 of SEK 20.00 per share (15.00). The record date is Tuesday, 13 March 2007, and dividends are expected to be paid via VPC on Friday, 16 March 2007. The last day for trading in the Com- pany’s stock including the right to the dividend is Thursday, 8 March 2007.

Notice of Annual General Meeting

Notice of the Annual General Meeting is made by letter to the shareholders as well as through advertisements in Svenska Dagbladet and the Offi cial Swedish Gazette. The agenda of the Meeting and items of business to be conducted are included in this notice.

Financial calendar 2007

Interim report January–March, 18 April Interim report January–June, 18 July

Interim report January–September, 17 October

Sales reports are released separately for the months January, February, April, May, July, August, October and November. For release dates, visit www.axfood.se fi nancial info/calendar. Copies of this annual report will be sent to shareholders upon request.

ANNUAL GENERAL MEETING AND FINANCIAL INFORMATION

Text and production: Axfood, Hallvarsson&Halvarsson.

Design: Meze Design.

English translation: Joseph Brennan.

Photos: Gunnar Seijbold except pages 2 and 22 Mats Widén.

Repro and printing: Strokirk-Landströms in Lidköping 2007. External sales

SEK 3,127 m 11%

SEK 226 m 19%

978 14%

SEK 5,829 m 20%

SEK 79 m 7%

1,920 27%

SEK 15,115 m 52%

SEK 558 m 46%

3,150 45%

SEK 4,570 m 16%

SEK 108 m 9%

611 9%

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Consolidated sales totalled SEK 28,808 m (28,086).

Sales for Group-owned stores rose 4.0% during the year. Like-for-like sales increased by 1.0%.

Operating proﬁ t was SEK 1,204 m (1,040).

Earnings per share were SEK 16.03 (13.37).

Willys and Willys hemma were merged.

The decision was made to concentrate Axfood’s fruit and vegetable purchasing to a single supplier.

The dispute between Axfood and the Vi retailers association was resolved through a settlement.

The sale of Spar Finland was completed on 12 January 2006.

Highlights 2006

The year in ﬁ gures¹⁾

Amounts in SEK m unless indicated otherwise 2006 2005

Net sales 28,808 28,086

Operating profi t 1,204 1,040

Operating margin, % ²⁾ 3.9 3.7

Profi t after fi nancial items 1,183 1,026

Profi t after tax 852 729

Earnings per share, SEK 16.03 13.37

Earnings per share after dilution, SEK 16.03 13.35 Average number of employees

during the year 7,007 7,066

1) Spar Finland is reported as a discontinued operation on a separate line in the income statement for 2005, in accordance with IFRS 5. The fi gures above pertain to continuing operations.

2) Operating margin for 2006 excluding payment of SEK 89 m for the settlement with Vi.

%

Consolidated net sales ¹⁾

2002 2003 2004 2005 2006 0

5,000 10,000 15,000 20,000 25,000 30,000 SEK m

0 200 400 600 800 1,000 1,200

Consolidated operating proﬁt and operating margin ^{1, 2)}

2002 2003 2004 2005 2006 SEK m

■ EBIT, SEK m EBIT, %¹⁾ 1) Figures for 2004–2006 are reported according to IFRS. Goodwill amortization for 2002 and 2003 has been reversed.

2) Operating margin for 2006 excluding payment of SEK 89 m for the settlement

1) Figures adjusted for sales of Spar Finland.

0 1 2 3 4 5 6

HIGHLIGHTS 2006

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2

AXFOOD ANNUAL REPORT 2006

CEO’S MESSAGE

In 2006 Axfood achieved its best result ever in the Group’s history, when we posted an operating profi t of SEK 1,204 m (1,040) on sales of SEK 28,808 m (28,086). Axfood has benefi ted from the high level of consumption in Sweden and

greater integration within the Group. Despite continued tough competition, Axfood defended its market shares at the same time that we kept a close eye on margins and earnings. Willys continues to be the engine behind Axfood.

During the year, the market was char- acterized by continued fi erce competition, especially from newly established stores. In some areas and in certain regions, we are currently seeing saturation in the market.

Today we can say that it is a customer’s market. The offering is great, the varia- tions are many, and customers are being offered more and more alternatives. On weekdays, many customers – especially families with children – want to be able to shop effi ciently and at relatively low prices to meet their basic needs. On weekends, customers are more selective and are look- ing for food ideas that are conducive to so- cializing and to spending time with friends and family. Axfood is meeting all these needs through the Hemköp and Willys chains. We have also benefi ted from higher consumption in the restaurant segment via Axfood Närlivs and Snabbgross.

Today discount stores make up a clear segment for shoppers, with more or less distinct store formats that are run in chain form. I am happy to note that Willys, which now has a nationwide presence, is a shining star in the discount market and now has a presence from Trelleborg in the south to Luleå in the north. The challenge is to maintain and strengthen this position in order to further increase our market shares.

Nine new Willys stores were opened during the past year. In 2007 we will be focusing on organic growth throughout the chain. Our long-term growth targets remain unmoved, however.

2006 the best year in the Group’s history

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CEO’S MESSAGE

Willys hemma was integrated with the rest of the Willys chain in 2006. Combining these chains was a logical move consider- ing the synergies that exist in administration, pricing and product strategies.

Development at Hemköp is moving in the right direction, and in 2006 we saw the result of several changes in the product offering and stores. We will need both this year and next to reach profi tability levels that are satisfactory.

Half of Hemköp’s 158 stores are today owned by Axfood, while the other half are run as franchises. We work together with our franchisees in a daily process in which we exchange experiences and ideas.

Five new Hemköp stores are planned for 2007, of which two will be converted from Willys. For Hemköp as well, the primary focus in 2007 will be on organic growth.

Dagab has gradually been transformed into a logistics partner for Axfood’s wholly owned chains and franchise stores.

A further step in this integration involves the total implemen- tation of a system for automatic re-stocking. This will help optimize the inventory structure, which in turn will lead to lower costs and create a more effi cient supply chain. Another major step in Dagab’s effi ciency improvement work entailed the construction of a new high-rise warehouse in Gothenburg, which began operating in 2006. During the year, a decision was also made to build a new high-rise warehouse in Jordbro, outside Stockholm, and to invest in a new cold-storage ware- house in Borlänge.

Axfood Närlivs and Snabbgross have had outstanding development in recent years. Snabbgross has done very well with its expansion in the food service and restaurant segment, and this focus will continue. Axfood Närlivs supplies products and services to the Handlar’n and Tempo chains, as well as to service stations and other convenience stores. In all there are some 150 stores operating under the Tempo concept and about 230 Handlar’n stores.

In 2006 Axfood reached a settlement with the Vi retailers association, and we chose to go our own ways.

Our focus in 2007 will be on growing organically, through existing units. This means that we will be slowing the pace of new establishment by accelerating our work on further stream- lining fl ows that favour organic growth.

Higher energy costs for transports, refrigeration/freezer systems and store operations are something we must manage in order to be able to continue growing with satisfactory profi t- ability. We cannot achieve this only by cutting costs. We must also increase our sales volume and sell a little more to every customer who has chosen to shop at one of our stores.

Our consistent focus on our private label products makes both us and our customers winners. Our customers gain the option to choose a product that is cheaper than the leading brand, but with a comparable level of quality and taste. By 2008, private label products will account for 25% of our total sales.

2006 would not have been the strong year it was without committed employees – something that is characteristic of Axfood. From north to south, every committed employee makes the difference between a good result and a less-good result.

The store is our stage, and every day is a new show. Much of the challenge facing our leaders involves inspiring commitment and enthusiasm to step up on this stage and perform over and over again – and to win an ovation from the customers every time.

We expect the fi erce level of competition to continue in 2007. For Axfood, our focus is on growing organically, with existing units.

Axfood expects operating profi t for 2007 to be level with 2006, excluding the compensation from the settlement with Vi.

Anders Strålman

President and CEO

Axfood AB

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4

Axfood’s strategic platform

Axfood is the challenger in the Swedish and Nordic retail food market. Since its start in 2000, Axfood has held fast to its busi- ness mission to create, develop and operate successful grocery store chains – Group-owned or proprietor-operated. Through distinct and unique customer offerings, we provide quality, wholesome food to our customers at reasonable prices. Axfood’s business mission can be summarized in the following seven points:

Distinct brand strategy Greater private label share Market expansion More wholly owned stores Central purchasing Flat organization Integration at all levels

Strategies

Axfood’s strategic initiatives are a natural part of the Group’s daily business. The Group’s strategic strengths are:

Long-term fi nancial strength A strong discount concept

A viable platform in the revitalized Hemköp An integrated logistics partner

Strong private labels

A strong base of Group-owned stores

Without detracting from these key success factors, Axfood works according to three main strategies: profi table growth, optimal operation and cost effi ciency.

In 2007 Axfood will be focusing primarily on the following areas and measures:

Organic growth of Willys and Hemköp Continued refi nement of the customer offering Continued build-up of IT structure

Cost control

Developing and fi ne-tuning the Group’s private label strategy

Continued development of the non-food product offering

Focus 2007

0 1 2 3 4 5 6

Consolidated operating margin ^{1, 2)}

2002 2003 2004 2005 2006 0 5 10 15 20 25 30 35 40

Return on capital employed ³⁾

2002 2003 2004 2005 2006 0 5 10 15 20 25 30 35 40

Equity ratio ³⁾

2002 2003 2004 2005 2006 0 30 60 90 120 150

Dividend as % of proﬁt ³⁾

2002 2003 2004 2005 2006

% % % %

1) Figures for 2004–2006 are reported according to IFRS. Goodwill amortization for 2002 and 2003 has been reversed.

2) Operating margin for 2006 excluding payment of SEK 89 m for the settlement with Vi.

3) Figures for 2005 and 2006 are reported according to IFRS. Figures for 2004 have been recalculated according to IFRS. In accordance with IFRS 5, Spar Finland is reported as a discontinued operation on a separate line in the income statement for 2005. Marked figures and key ratios pertain to continuing operations in 2004 and 2005. Other figures and key ratios pertain to the total operations (including Spar Finland), since according to IFRS 5, the balance sheet for the comparison year, 2004, is not to be recalculated.

STRATEGY AND GOALS

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How often do you shop at Willys?

Frequently – once or twice a week. The quality is good. I buy Willys’ own products and am making my way through the entire product line to see which ones I like the best. Price is important when I do my weekly “big” shopping.

Ann-Charlotte Wester

Proﬁ table growth

For Axfood, profi tability is paramount. Without profi tability we can’t build a future. Axfood’s Group-owned stores shall strive for organic growth, while growth will also be pursued through acquisitions and store establishment in the Willys and Hemköp chains, and through stores tied to the Axfood Närlivs chains – Tempo and Handlar’n.

Axfood is also pursuing growth through new product seg- ments, new private label products, and through expansion of its non-food product offering, which includes such products as kitchen accessories, toys and textiles.

Optimal operation

In order to re-stock store shelves and inventories as smoothly as possible, Axfood has adopted a new strategy for its supply chain and wholesale activities. Today Dagab is an integrated logis- tics partner that mainly serves the Group’s stores. To further improve Dagab’s effi ciency, in 2007 an automated ordering system, called Autoorder, is being installed in stores throughout the Group to facilitate order-handling and re-stocking. Dagab is also changing it’s internal structures, and in an effort to better serve stores across the country, the warehouse in Borlänge is being expanded to incorporate a full-range cold storage facility.

By maintaining high delivery reliability, Dagab is helping to make sure that Axfood’s customers are always greeted with well-stocked stores no matter where they do their shopping.

The Group’s stores in the Willys, Hemköp and Axfood Närlivs operations will be further developed in 2007, among other things through an increased offering of perishables.

Axfood’s range of private label products will be expanded and developed to the customers’ benefi t. Demand for Axfood’s

house brands is high, since they maintain a high standard of quality at low prices.

The Compass management tool is being used to opti- mize store operations to the customers’ benefi t. Compass was introduced in 2005 and further developed in 2006. In 2007, yet another step will be taken when Compass becomes a functional tool that management and store employees can use on a daily basis. Compass provides a handy indicator of goals in various areas which are easy to monitor and measure and which improve store performance.

Cost efﬁ ciency

Through effi cient operation and leadership training initiatives, the aim is to lower staff costs in relation to sales. Cost effi ciency permeates the entire Group – from stores to staffs – and is the backbone of our low prices.

Operative goals

STRATEGY AND GOALS

0 5,000 10,000 15,000 20,000 25,000 30,000

Group-owned retail stores in Sweden, Sales

2002 2003 2004 2005 2006 SEK m

0 5 10 15 20 25

Private label products,

% of total sales, December

2002 2003 2004 2005 2006

%

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The business model we use to create value for Axfood’s share- holders is fundamentally simple. It is based on our core strate- gies, with three areas of focus: profi table growth, continued operational development and cost effi ciency.

Revenues

Profi table growth has top priority at Axfood. To achieve this, we must offer customers the best value and shopping experience at our stores.

Since its formation in 2000, Axfood’s wholly owned stores in Sweden have posted average annual growth of 13%. Since the overall market has grown by only a couple per cent per year, this means that Axfood has been gaining market share every year. Axfood’s goal is to continue taking market share.

To continue growing faster than the overall market, Axfood will need to grow organically as well as through store acquisi- tions and new-store establishment.

The discount segment in Sweden is expected to grow considerably faster than the total market, from about 13%

today to approximately 20% in the years immediately ahead.

Axfood – through Willys – is the largest in this segment today with a market share of slightly more than 50%. The goal is to maintain our leading position in the growing discount segment, where the number of new players has increased.

Axfood’s other major store chain, Hemköp, exists in a tough market. Although the traditional grocery store segment is expected to contract in relation to the overall market, it is still the largest segment. By addressing the rising environmental awareness of consumers and taking a more distinct focus on health, quality and wholesome food, Hemköp has found a viable position in metropolitan areas and other central city locations.

Private label products are an important revenue stream which strengthen Axfood’s offering to its customers and give them access to high-quality products at attractive prices. Since 2000, when Axfood’s private labels were launched, their share of total sales has grown from 4% to 20% today. This translates to SEK 150 m in improved operating profi t each year for the Group. Axfood’s goal is that private label products will account for 25% of total sales.

6

Creating value for Axfood’s shareholders

BUSINESS MODEL

Customers receive the best

value in our stores.

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Costs

Personnel, purchases of goods and premises account for 96% of the store chains’ total overhead. Through centralized purchasing, costs can be cut signifi cantly. Since Axfood’s establishment, coordinated purchasing and category management have been cornerstones in its effi ciency improvement work and have made a strong contribution to the Group’s earnings improvements.

In close cooperation with its employees, Axfood has adopted an ongoing programme to raise productivity while not cutting back on customer service.

Distributing products across Sweden is a major challenge due to a sparse population in a very long country. By integrating our own logistics partner Dagab in the Group, we have been suc- cessively lowering our distribution costs at the same time that Axfood has gained opportunities to provide better service to its customers and stores.

Automatic re-stocking, increased automation and more effi cient and environmentally friendly transports are other aspects in our work on keeping costs to a minimum.

As a part of this effi ciency-improvement work, Dagab has changed its internal organization, expanded outwards and up- wards in Backa, and in 2007 and 2008 it will be carrying out changes at its distribution centres in both Borlänge and Jordbro.

The aim is to facilitate product handling at stores so that employees will not have to spend as many hours receiving and unpacking products, but can instead spend more of their time on customers and service.

Cash ﬂ ow/debt

Axfood’s strategy from the start has been to have as little capital tied up in operations as possible. At year-end 2000 the Group’s interest-bearing net debt was SEK 2,206 m, compared with the close of 2006, when net debt was SEK 61 m. During this same period, the Company paid SEK 2,093 m in dividends to its shareholders and repurchased shares worth SEK 430 m. The equity ratio is now up to 39.8%, compared with 13.7% in 2000.

Axfood’s board has proposed a dividend of SEK 20.00 per share to the 2007 Annual General Meeting, or SEK 1,049 m.

Axfood’s cash fl ow improvements have been achieved pri- marily through sound and profi table business. Average capital employed has decreased from SEK 4,003 m to SEK 2,887 m today. The major capital rationalization measures have now been taken, and the ambition is to keep capital employed intact through various effi ciency-improvement programmes while

pursuing expansion of the Group-owned retail operations. Through the combination of strong earnings and effi cient use of capital, the return on shareholders’ equity is now 32.5%.

Future cash fl ows will fi nance Axfood’s investments in operations. Axfood has sustained a high pace of investment from the start, and in the years ahead, capital expenditures are expected to be in the range of SEK 600–700 m per year, which can be put in relation to depreciation and amortization, which are expected to be somewhat lower.

Compass

The Compass management tool was introduced at all

stores in the Axfood Group in 2005. Through Compass, Axfood employees have acquired a tool for conducting month-by-month comparisons of store performance as well as comparisons with other stores within their respective chains. Compass is based on four parameters:

Customers. This metric measures how satisfi ed customers are.

Internal audits are performed to ensure that stores adhere to their adopted retail concepts. In addition, monthly checks are made of whether some of the most popular products are in stock or not.

Finance.

This measures sales trends, gross margins, staff costs, profi t performance and shrinkage.

Operations.

This metric measures the stores’ current private label share, hygiene, food safety and loyalty to the product offering.

Employees.

This metric measures – among other things – employee work attendance and exercise habits, as well as the effectiveness of workplace organization and meeting structures.

Compass results are presented on a scale of green, yellow and red, where green means pass and red fail.

In 2006 Compass was also introduced at Dagab and Axfood Närlivs.

The ultimate goal of Compass is to create more profi table and better stores, which will lead to more satisfi ed customers and employees.

BUSINESS MODEL

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8

Axfood shares rose 27% in 2006

Axfood’s shares have been listed on the Stockholm Stock Exchange since 1997 – today the OMX Nordic Exchange, Large Cap list. At year-end 2006 Axfood’s share capital was SEK 272.9 m, divided among 54,583,828 shares. All shares have equal voting power and equal entitlement to the company’s profi t and equity.

Price trend and trading volume

Axfood’s share price rose by approximately 27% in 2006. The stock opened the year at a price of SEK 222.0, on 2 January.

The share price turned downward early in 2006, but was fol- lowed by a strong rise during the autumn. On 29 December Axfood’s shares closed at SEK 283.0, after hitting an all-time high of SEK 285.5 during the day. The lowest price paid during the year was SEK 185.0, on 4 April. The stock market as a whole (OMX Nordic All-Share index) gained 24% for the year.

Axfood’s market capitalization at year-end was SEK 15,447 m (12,101).

During the last fi ve years Axfood’s stock has performed very well compared with the market average. An investment of SEK 1,000 in Axfood shares at the start of 2002 would have been worth SEK 2,984 at year-end 2006, including reinvested dividends. If that same investment had performed in parity with the SIX Return Index, which gauges the market average including reinvested dividends, the investor’s SEK 1,000 would have increased to SEK 2,843 during the same period.

A total of 48.9 million (55.2) Axfood shares were traded in 2006, for a combined value of SEK 10,625 m (10,558). This cor- responds to a turnover rate of 90% (102%), compared with aver- age turnover of 132% (87%) for shares on the Nordic Exchange.

Average daily trading volume was 194,656 shares (218,101), for a value of SEK 42.3 m (41.7). An average of 312 transactions (247) were made per trading day.

Dividend

Axfood’s dividend policy is to pay out a minimum of 50% of profi t after tax. For the 2006 fi nancial year the Board proposes a dividend of SEK 20 per share, of which SEK 12 in ordinary dividend and SEK 8 as an extra dividend (SEK 15, of which SEK 9 in ordinary dividend), corresponding to a total of SEK 1,049 m (811) based on 52,467,678 shares in issue. The proposed dividend corresponds to 123.1% (119.1%) of profi t after tax for 2006. Since 2002 Axfood has paid out an average of 83.2% of profi t after tax in yearly dividends. Dividends are expected to be paid out via VPC on 16 March 2007.

Ownership structure

Axfood had 9,972 (9,714) shareholders at year-end 2006, at which time the ten largest owners held 57.0% of the shares (57.5%). Swedish individuals owned 56.2% (54.6%) of the shares at year-end 2006, while Swedish mutual funds and institutions owned slightly less than 16.3% (21.5%). Foreign ownership in Axfood was approximately 27% (24%).

Share repurchases

In March 2005, Axfood’s Annual General Meeting (AGM) resolved to authorize the Board to repurchase up to 2,000,000 of the Company’s own shares, on one or more occasions during the time up to the next AGM. In February 2006, Axfood’s board decided to initiate share repurchases within the scope of the above mandate, continuing up until the 2006 AGM. A total of 476,400 shares were repurchased for a total of SEK 95 m.

At the 2006 AGM, it was resolved to authorize the Board to decide on repurchases of up to 4,000,000 of the Company’s own shares – through purchases on the Stockholm Stock Exchange – on one or more occasions during the time up to the next AGM. The AGM also authorized the Board to, in connection with the fi nancing of company acquisitions, transfer treasury shares on the stock exchange or in some other way. In March 2006, Axfood’s board decided to initiate share repurchases under the new 4,000,000 share mandate, up until the 2007 AGM. At total of 1,639,750 shares were repurchased under this mandate for a total payment of SEK 335 m.

The repurchases were made in stages and are dependent on market terms and applicable rules at each specifi c point in time. The aim of both repurchase programmes was to adapt the Company’s capital structure to its current operations.

As per 31 December 2006, Axfood had 2,116,150 treasury shares, against payment of SEK 430 m. No treasury shares were transferred during the year.

Shareholder categories, 31 December 2006, %

Geographic distribution of shareholders by the ﬁve largest countries, 31 December 2006, %

■ Sweden 74.0

■ USA 9.4

■ UK 6.1

■ Luxembourg 3.1

■ Belgium 1.9

■ Other 5.5

■ Swedish institutions 5.4

■ Swedish mutual funds 10.9

■ Individuals, incl. closely held companies 56.2

■ Foreign shareholders 27.5

AXFOOD SHARE DATA

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Source: SIX/Hallvarsson&Halvarsson

Axfood shares, price trend and trading volume 2006

150 200 250 300

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Monthly trading volume SX30 Consumer Staples OMXS All Share Index

Axfood

DecI NovI Oct I SepI Aug I Jul I JunI MayI AprI MarI FebI Jan I I

SEK '000 shares

Key data for Axfood shares

2006¹⁾ 2005¹⁾ 2004¹⁾ 2003 2002

Dividend, SEK 20.00²⁾ 15.00 11.00 5.50 5.00

Dividend as % of net profi t ³⁾ 123.1 119.1 73.7 43.0 42.6

Number of shares outstanding at year-end ⁴⁾ 52,467,678 54,531,378 53,577,828 53,497,028 53,229,028

Average number of shares outstanding 53,162,625 54,531,378 53,567,009 53,248,074 53,229,028

Share price at year-end, SEK 283 222 225 166.5 162

Highest/lowest price paid, SEK 285.5/185.0 236.5/168 229/160.5 174.5/120 180/115

Dividend yield, % ⁵⁾ 7.1 6.8 4.9 3.3 3.1

Earnings per share before dilution, SEK ⁶⁾ 16.03 13.37 14.67 12.85 11.75

Earnings per share after dilution, SEK ⁶⁾ 16.03 13.35 14.42 12.62 11.51

Net asset value per share, SEK 46.12 51.81 49.35 39.76 31.81

Net asset value per share after dilution, SEK 46.12 51.76 48.44 38.97 31.09

P/E multiple before dilution ^{6, 7)} 17.7 16.6 15.3 13.0 13.8

P/E multiple after dilution ^{6, 7)} 17.7 16.6 15.6 13.2 14.1

Turnover rate, % 90 102 47 57 36

Number of shareholders 9,972 9,714 9,519 9,890 9,613

Breakdown of shareholder by size of holding at 31 December 2006

Size class No. share-

holders, % No. share-

holders Share of

capital, % Share of votes, %

1 – 500 82.3 8,202 2.5 2.5

501 – 1,000 7.8 775 1.2 1.3

1,001 – 2,000 3.6 358 1.1 1.1

2,001 – 5,000 2.4 242 1.5 1.6

5,001 – 10,000 1.3 126 1.7 1.8

10,001 – 20,000 0.9 89 2.4 2.5

20,001 – 50,000 0.8 80 4.7 4.9

50,001 – 100,000 0.3 30 4.1 4.3

100,001 – 0.6 70 80.8 80.0

100.0 9,972 100.0 100.0

The 10 largest shareholders at 31 December 2006

Name No. shares Share of capital, % Share of votes, %

Axel Johnson AB 24,290,066 44.5 46.3

SEB funds 1,445,749 2.7 2.8

SHB/SPP funds 1,170,712 2.2 2.2

Swedbank Robur funds 545,524 1.0 1.0

Enter funds 529,400 1.0 1.0

Nordea funds 511,819 0.9 1.0

Sax Göran (via family and companies) 460,013 0.8 0.9

SEB-Trygg Insurance 338,700 0.6 0.6

Skandia funds 333,913 0.6 0.6

Skandia Global Funds 319,100 0.6 0.6

Total, 10 largest owners 29,944,996 54.9 57.0

Other owners 22,522,682 41.2 43.0

Total 52,467,678

Treasury shares 2,116,150 3.9 –

Total 54,583,828 100.0 100.0

1) The key ratios for 2004–2006 have been recalculated according to IFRS. ⁵⁾ Dividend per share divided by the share price at year-end.

Axfood shares, total return 2002–2006

50 100 150 200 250 300 350

SIX Return index Axfood, total return

I 2006 I 2005 I 2004 I 2003 I 2002 I

Source: SIX/Hallvarsson&Halvarsson SEK

AXFOOD SHARE DATA

1. 2.

3.

4.

Reporting dates 2006

1. Year-end report, 2 Feb. 2006 3. Q2 report, 19 July 2006 2. Q1 report, 19 April 2006 4. Q3 report, 24 Oct. 2006

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Axfood has a department that has overall responsibility for all store purchasing. All of Axfood’s supplier contracts are routed through this department. In consultation with the store chains, the purchasing department is also responsible for determining what the product offering will be in the various stores.

In the same way, Axfood has a central logistics partner in Dagab, which manages and takes responsibility for deliveries to the Axfood Group’s stores. Having a single purchasing department and a single logistics company ensures an effi cient fl ow of products from suppliers to store shelves. Moreover, Axfood’s purchasing and logistics model provides opportunities for greater effi ciency gains, such as through faster inventory turnover, faster product ordering, simpler ordering routines and more effi cient transports.

For Axfood, the work of a centralized purchasing and product unit and a centralized logistics handler means that we can focus on extracting cost- and quality advantages from every link in the supply chain. This also gives Axfood strength and credibil- ity in its relations with suppliers, who know that all our stores are bound to our joint purchasing routines and joint product assortment.

Axfood’s store chains all have their own product assortment strategies. Hemköp and Willys also have their own private labels.

Over the years, Axfood has invested heavily in IT in the aim of creating a well-working infrastructure, which is generating signifi cant effi ciency gains.

Effi ciency at every level

Supply chain – from supplier to store shelf

Axfood handles approximately 20,000 items.

Axfood’s goal is to have 97% delivery reliability.

With respect to our fresh products, we demand that 80% of shelf life is spent in stores.

Private Labels

Orders Orders

Orders

Distribution Distribution

Hemköp Axfood Närlivs

Willys Willys hemma

Store stocks have an

annual turnover of

approx- imately

20–25 times.

Stores

Repackaging and logistics

Dagab’s inventory has an average turnover of 14 days.

60% of products from

suppliers via Dagab to

stores.

Dagab Suppliers

40% of products go directly

from suppliers to stores.

Suppliers Products & Purchasing Product assortment strategy Stores

Organization

10 AXFOOD’S SUPPLY CHAIN

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PRIVATE LABELS

Good products at attractive prices

When customers buy groceries, they are usually looking for brand-name products. To avoid being totally dependent on suppliers and to be able to some extent to steer our product assortment, over the years at Axfood we have built up a line of our own private label products.

The majority of shoppers in the Swedish retail food market today have a positive view of private label products. According to a study conducted by the Swedish Research Institute of Trade (HUI) in autumn 2006, 62% of respondents said that store chains’ own products gave them better freedom of choice. Most older respondents said that they trusted the stores’ private label products more than the brand-name suppliers’ products. This can partly explain the very high growth in Axfood’s private label sales, which have risen from 4% to 20% of total sales.

For Axfood, it is not a matter of opposition, but of comple- menting its product offering. Private label products are needed to help customers fi nd quality products with good value.

Today Axfood is leading the trend in private label product development in Sweden, and private label products account for more than 20% of the Group’s total sales. The goal is to continue growing this share.

Brand strategy

Axfood’s private label strategy is simple. In order for products to bear the Willys or Hemköp name, they must have a comparable level of quality to the market-leading product in their respective categories, at a price that is roughly 10%–15% lower.

Axfood also has other private labels than the Willys and Hemköp house brands. Two of these that are used throughout the Group are Func, featuring a line of batteries, lightbulbs, and similar, and Fixa, a line of kitchen supplies. Another Group- wide private label is Eldorado, which is a so-called fi ghting brand that features prices that are 20%–30% lower than other brand-name products. Eldorado products generally have a simpler standard of quality than the market leaders.

To date, Axfood’s private label products have had their greatest success in the discount segment, where they account for 24%–27% of Willys’ and Willys hemma’s total sales. For Hemköp, private label products account for 13% of total sales.

Product safety

Product safety is paramount for Axfood’s private label products.

Toward this end, Axfood conducts extensive quality assurance and safety analysis. Quality assurance is conducted on several levels before a supplier is approved. Axfood also studies how consumers perceive the products’ quality, in both internal and

Axfood is also one of some 270 retail companies around the world partici- pating in the Global Food Safety Initiative. As of 2006 this organization had agreed on six global standards for food safety while also exercising oversight through on-site inspections, spot tests and analyses.

Axfood’s work on food safety for its private label products is conducted in fi ve steps:

1. Supplier evaluation

Only sup- pliers that can show a valid certifi cate from any of the Global Food Initiative

standards are considered as Axfood private label

suppliers. Axfood makes recurrent visits to its suppliers to discuss product knowledge and product development.

2. Product control

A product specifi cation is always required for every product and must include an exact list of all ingredients and their sources.

3. Laboratory analyses

Axfood conducts its own microbiologi- cal and chemical analyses of products. For example, checks are made to ensure that products actually keep until their best-be- fore date, or to trace any toxic moulds or residual insecticides.

4. Package labelling

Axfood always checks to make sure that everything that must be labelled on a package is actually included. Packages must also include instructions for sorting/

disposal and consumer contact information.

5. Consumer tests

Quality is also about how a product is perceived by the consumer. Therefore it is important to also evaluate criteria such as appearance, taste and consistency, as well as nutritional value, safety and environmental aspects.